If a co-partner leaves the partnership in return for a settlement from the joint assets, this transaction is treated as a transfer of the co-partner's share according to the case law of the Federal Fiscal Court (BFH), but with the application of the provisions on real division (Section 16 (3) sentence 2 EStG) – a so-called “false partition in kind”. In its decision of August 21, 2025 (case no. IV R 16/22), the BFH clarifies a number of related legal issues that were still open even after the BMF letter of December 19, 2018, in particular with regard to the creation of own shares. 

The corporate purpose of the plaintiff GmbH & Co. KG in the dispute was the acquisition and management of shares in B-AG. One of its limited partners was initially W-AG, which merged with B-AG in July 2016; its limited partnership interest was thus transferred to B-AG. It left GmbH & Co. KG in November 2016 (due to the merger). As compensation, it received its own no-par value shares (corresponding to the shares originally contributed to GmbH & Co. KG as a limited partnership contribution) and a cash payment corresponding to the liable capital. B-AG later withdrew the shares it had received. The point of contention was whether B-AG's withdrawal from GmbH & Co. KG had triggered a taxable gain on disposal pursuant to Section 16 (3) sentence 1 EStG or whether there had been a “false partition in kind” with the consequence of the continuation of book values pursuant to Section 16 (3) sentence 2 EStG. 

The first-instance tax court considered the requirements for a “false partition in kind” to be fulfilled. The shares contributed had not become objects of sale, but had been transferred by GmbH & Co. KG to the business assets of B-AG as assets “suitable for partition in kind.” The subsequent redemption measures and cash payment did not change this. The BFH confirmed this and rejected the tax office's appeal.

In the course of a “false partition in kind”, B-AG had received no-par value shares from the joint assets of GmbH & Co. KG, which in this respect are to be classified as suitable individual economic assets. The tax neutrality of the division of assets does not fail because the no-par value shares became treasury shares as a result of the transfer to B-AG. This is because they did not lose their status as economic assets, i.e., as carriers of hidden reserves. In the absence of any evidence that B-AG had already planned or intended to redeem the no-par value shares at the time of their transfer, it was also assumed that the required transfer of treasury shares acquired for redemption had not taken place. The provisions of Section 272 HGB introduced by the BilMoG in 2009 do not preclude such treasury shares from continuing to be treated as eligible economic assets for tax purposes.

The no-par value shares were also transferred to the business assets of a co-entrepreneur – B-AG. This is because they had become part of the business assets of a co-entrepreneur involved in the partition in kind and their hidden reserves continued to be allocated solely to the real dividers – in this case, B-AG alone – after the transfer. As the owner of its own shares, a corporation is solely entitled to the hidden reserves inherent in these assets and is solely entitled to realize its shares. It is irrelevant that the shares were later redeemed and that the hidden reserves were thereby transferred to the remaining shareholders at that later date.

Similarly, in the event of a dispute, the future taxation of the hidden reserves inherent in the shares was ensured – another prerequisite for tax-neutral real division. As the no-par value shares were transferred to the domestic business assets of B-AG, the (German) tax authorities continue to have fundamental access to the hidden reserves for taxation purposes. In this respect, it is irrelevant how a subsequent removal of these assets from the business assets of B-AG is to be treated under corporate income tax law, i.e. whether the sale of own shares constitutes a capital measure that is tax-neutral overall for the corporation or a sale transaction within the meaning of Section 8b of the German Corporation Tax Act (KStG). The Federal Fiscal Court therefore expressly left this question unanswered. 

The fact that B-AG had received a cash payment equal to its liability contribution in addition to the no-par value shares was also irrelevant. This is because (proportional) profit realization is ruled out in any case if - as in the case in dispute - it is clear that the cash payment made by GmbH & Co. KG cannot be considered remuneration for the hidden reserves inherent in the co-entrepreneurial share. In particular, a repayment in the amount of the liability capital has no economic connection with the hidden reserves inherent in B-AG's co-partner share.

Although fulfilled in terms of wording in the case decided, the so-called corporation tax clause of Section 16 (3) sentence 4 EStG did not preclude tax-neutral real division. This is because, by way of teleological reduction, this provision must be interpreted to mean that the fair market value approach does not apply to the transferred individual asset if there is no transfer of hidden reserves from the income tax regime to the corporation tax regime. Accordingly, the book values are to be carried forward if, at the time of the withdrawal of the co-partner corporation from the partnership, only (domestic) corporations hold interests in the partnership. In this respect, the BFH contradicts the opinion of the tax authorities 
(see BMF letter dated December 19, 2018, margin number 11).


Notice:

In the meantime, the Annual Tax Act 2024 of December 2, 2024, introduced Section 6 (5) sentence 7 EStG, which breaks with previous case law and also applies to real division via the reference in Section 16 (3) sentence 5 EStG. According to this provision, carrying forward the book value is also ruled out if the hidden reserves within the corporation tax regime are transferred between different corporation tax subjects (subject-related nature of hidden reserves). However, this new provision applies for the first time to transfers of economic assets that take place after October 18, 2024, and was therefore not applicable in the case in dispute.  


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